ASEAN must nurture growth at epicenter

by Admin IFG Progress


14 December 2023

Penulis: Ibrahim Kholilul Rohman [1], Tarisha Yuliana [2]

As ASEAN commemorates its 56th anniversary this year, Indonesia as the chair is highlighting the theme of “ASEAN Matters: Epicentrum of Growth”. This theme encapsulates both promise and challenge. ASEAN nations grapple with disparities in total factor productivity (TFP), a key economic indicator that measures the ratio of output to the combined inputs of capital and labor, which stands as a comprehensive yardstick for productivity and the efficiency of resource utilization in the production process.

Early International Monetary Fund (IMF) studies underscore significant discrepancies among ASEAN member states. From 1978 to 1996, Singapore (2.2 percent), Thailand (2.0 percent), and Malaysia (2.0 percent) exhibited more robust TFP growth, while Indonesia trailed at 1.2 percent and the Philippines even experienced negative performance (-0.8 percent). A more recent 2018 study by the ASEAN Secretariat highlighted a persistent divide, revealing that seven out of ten ASEAN countries witnessed negative average TFP growth rates, with Malaysia, Singapore and Thailand as the exceptions.

As the trajectory of TFP closely aligns with research and development (R&D), as noted by Steven Englander in his Organisation for Economic Co-operation and Development (OECD) observations, it becomes imperative to probe the factors contributing to lagging productivity within ASEAN. The World Intellectual Property Organization (WIPO) revealed that limited R&D engagement primarily stems from the middle-income classification of most ASEAN economies, leading to constrained R&D funding, especially for industrial players.

A pivotal question emerges: Has ASEAN’s investment-friendly disposition stimulated R&D and, by extension, productivity? The ASEAN Secretariat’s report accentuates the positive trend of investment in the region, disclosing that in 2021, the region rebounded with a 42 percent surge in foreign investment, countering the COVID-induced downturn. This resurgence translated into a significant inflow of US$174 billion, solidifying ASEAN’s position as a prime recipient of foreign investment among developing economies, second only to China in 2021.

This influx of Foreign Direct Investment (FDI) predominantly funnels into the manufacturing sector, closely followed by financial services and the service industry, pillars that underpin digital economic expansion. Particularly noteworthy is the striking 134 percent upswing in FDI within the manufacturing sector, amounting to a substantial $44.7 billion. These investments notably target cutting-edge industries such as Electric Vehicles (EVs), electronics, biomedics and pharmaceuticals.

However, R&D within ASEAN’s manufacturing landscape has yet to attain the desired dynamism. Analysis of a dataset encompassing manufacturing firms from the World Bank Enterprise Survey revealed a concerning trend: foreign ownership appears to constrain R&D expenditures. This observation resonates with the World Bank’s assessment, indicating that ASEAN’s average R&D spending hovers around 0.84 percent of gross domestic product (GDP) up to 2018. Regrettably, Indonesia’s R&D investment remains below this average, at approximately 0.28 percent of GDP.

Especially for Indonesia, this figure is quite worrying as the country’s R&D landscape is grappling with disconcerting statistics: a mere 20 percent of its R&D expenditure emanates from the private sector, while a staggering 80 percent is shouldered by the government. This incongruity stands in stark contrast to UNESCO’s vision of a thriving R&D ecosystem, raising alarms about the nation’s innovation trajectory.

This pattern indicates that foreign investors are directing their resources predominantly toward shaping ASEAN into a manufacturing hub. This region, adorned with abundant natural resources, a labor force with competitive wages and business-friendly regulations, provides an enticing environment for such endeavors. Bolstering this assertion is the ASEAN Secretariat’s revelation of a 12 percent uptick in foreign investment, particularly via greenfield projects in the manufacturing domain. Notably, this trend is accentuated against the backdrop of United States-China trade tensions, which is compelling foreign entities to position ASEAN as a strategic interim manufacturing hub.

Turning our attention to demand dynamics, the ASEAN region, marked by economies with modest to moderate per capita income levels ($1,136 to $4,465), has fostered a consumption pattern intrinsically tied to price sensitivity, with less emphasis on product quality. Coupled with a relatively economical cost of living, the market’s demands do not invariably necessitate cutting-edge innovations.

Consequently, foreign investors often transplant technologies initially conceived through R&D endeavors within their home nations. Automobiles and ICT stand out as prominent examples where R&D activities predominantly take place in their countries of origin. This often relegates developing nations to the role of consumer markets, with limited access to the value that is added through local content regulations.

This continued condition might bring forth potential pitfalls for ASEAN. The concept of the “smiling curve” theory looms large; should a region merely function as a production hub, the retained value will be rather minimal. This is because most of the value in global value chains typically emanates from regions that prioritize and nurture R&D.

Hence, if ASEAN, with Indonesia in particular, sustains its identity as a consumer of innovation rather than an originator through R&D, the economic prospects, particularly within the manufacturing sphere, could be jeopardized.

The reverberations of this unfolding phenomenon are increasingly tangible. Insights from the World Bank unveiled a waning contribution of the industrial sector to the GDP across ASEAN nations. Consider Indonesia’s manufacturing sector, which has transitioned from commanding 25-30 percent of the GDP in 2000s to a mere 10 percent now. Likewise, Malaysia has witnessed an 8 percent descent, while the Philippines grapples with a 5 percent decrement.

As we witness a declining trend in TFP and a diminished share of manufacturing in the GDP composition, it is imperative to develop strategic interventions. The Indonesian ASEAN chairmanship in 2023 is responsible for incubating internal R&D capacity, transcending dependence on foreign entities for innovative impetus.

A self-sustaining R&D ecosystem must be nurtured, a paradigm that kindles investments and ignites an industrial revolution, thus priming the engine of GDP growth. R&D is pivotal in driving innovative outputs that enhance exports, bolster the balance of payments surplus and mitigate the impacts of commodity price fluctuations.

This article was published in with the title “ASEAN must nurture growth at epicenter “. Click to read:

[1] Senior Research Associate at IFG Progress

[2] Junior Research at the Institute for Economic and Social Research of University of Indonesia (LPEM UI)



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